The news leaked over the weekend: Hedge-fund baron Steve Cohen and SAC Capital Advisors were about to pay a monster fine for a decades worth of insider trading and failed supervision of traders. Some prefer the term “expert networks,” but – po-TAY-to, po-TAH-to.

The rules have changed, and so have the penalties. The lessons of the post-crisis era are clear:

• Laws are made to be broken
• Steal Big or don’t bother.
• Always reserve 10% of your criminal proceeds for your newest partner, Uncle Sam, to settle all claims, both civil and criminal.

This is a huge shift in the mentality of prosecutors, defense attorneys, accountants and constitutional scholars.

Lack of criminal prosecutions for bankers, hedge funds managers and other moguls has altered the calculus — huge fines are now a cost of doing business.

Whether you enjoy foreclosure fraud or find insider trading profitable or made money by reckless lending of subprime mortgages to people you knew would default or found your calling creating structured products designed to implode, the Rule of Law no longer applies to you.

Better make some hay while the sun is shining! It’s the newest form of tithing, between Uncle Sam and any financial mogul caught with his hand in the cookie jar.

By all appearances, the once-fierce visage of the Securities and Exchange Commission and the Justice Department has altered radically. Formerly the scourge of white-collar criminals, the prosecutorial apparatus has now morphed into a supersized meter-maid. The goal is no longer discouraging reprehensible behavior or stopping criminal activities; nor is it encouraging confidence in the markets. Rather, the former enforcers of the law have become a giant revenue collecting organization — Rule of Law be damned.

We have seemingly forgotten why we put people in jail in the first place. As public service, a brief reminder:

In the U.S., we have civil and criminal statutes. We create different levels of penalties for punishing different types of behavior. As a society, we want people to understand exactly what is and isn’t allowable. Some behaviors are frowned upon, and when those laws are violated, a monetary penalty is exacted. Driving faster than the speed limit or making false and misleading statements in the sale of a security leads to a fine, and a blot on your record.

There are other behaviors that are so reprehensible, so dangerous to all of society, that in response we impose a loss of liberty to any who are convicted of committing these crimes.

We make a very clear distinction between the two types of laws, and what the penalties are for violating them. At least, we used to.

Nowadays, so long as you can write a large enough check, you can escape criminal prosecution. Yes, it’s a lot of money and a blot on your reputation. But that’s what CIVIL prosecutions are supposed to be for.

When trying to reduce or eliminate a behavior with extremely negative repercussions for society, we bring out the big stick: Jail time.

At least we used to. Today, not so much.

Decades from now, when legal scholars try to pinpoint the moment when the U.S. abandoned the Rule of Law, they will point to 2008 crisis as a turning point.

The greatest innovation of the financial sector is not the ATM machine or interest-bearing checking accounts or securitization: It was convincing the powers that be that prosecuting them for their actual crimes would (once again) bring the economy to the edge of the abyss.

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

We do need the return of jail time. And forfeiture of all assets. All of them — no prior pass-throughs allowed. Co-mingled funds taint the entire pool of wealth, at that point. Step outside the laws regulating finance? You and your family will certainly be bankrupted.

Then, there’s social retribution (another stick we have certainly not employed, in a great while). Greed and the willingness to commit crimes in the pursuit of “shareholder value” (read: the corporate shield for diversion of “profits” into the pockets of the criminally liable while separating them, personally, from any punishment or loss of ill-gotten gains), have been rebranded as virtues.

Shame and shunning are no longer employed, and they should be. Charles Boycott is a good example of this tool, used effectively (Parnell’s advice would be used on Boycott):
____________________

“On 19 September 1880, Parnell gave a speech in Ennis, County Clare to a crowd of Land League members.[15] During his speech, he asked the crowd: “What do you do with a tenant who bids for a farm from which his neighbour has been evicted?”.[15] The response from the crowd was: “kill him”, “shoot him”.[15] Parnell replied:[16]
I wish to point out to you a very much better way – a more Christian and charitable way, which will give the lost man an opportunity of repenting. When a man takes a farm from which another has been evicted, you must shun him on the roadside when you meet him – you must shun him in the streets of the town – you must shun him in the shop – you must shun him on the fair green and in the market place, and even in the place of worship, by leaving him alone, by putting him in moral Coventry, by isolating him from the rest of the country, as if he were the leper of old – you must show him your detestation of the crime he committed.
This speech set out the Land League’s powerful weapon of social ostracism, which was first used against Charles Boycott.”

And Boycott’s situation, from his view:

“Before October 1880, Boycott’s situation was little known outside County Mayo.[6] On 14 October of that year, Boycott wrote a letter to The Times about his situation:[6]
THE STATE OF IRELAND
Sir, The following detail may be interesting to your readers as exemplifying the power of the Land League. On the 22nd September a process-server, escorted by a police force of seventeen men, retreated to my house for protection, followed by a howling mob of people, who yelled and hooted at the members of my family. On the ensuing day, September 23rd, the people collected in crowds upon my farm, and some hundred or so came up to my house and ordered off, under threats of ulterior consequences, all my farm labourers, workmen, and stablemen, commanding them never to work for me again. My herd has been frightened by them into giving up his employment, though he has refused to give up the house he held from me as part of his emolument. Another herd on an off farm has also been compelled to resign his situation. My blacksmith has received a letter threatening him with murder if he does any more work for me, and my laundress has also been ordered to give up my washing. A little boy, twelve years of age, who carried my post-bag to and from the neighbouring town of Ballinrobe, was struck and threatened on 27th September, and ordered to desist from his work; since which time I have sent my little nephew for my letters and even he, on 2nd October, was stopped on the road and threatened if he continued to act as my messenger. The shopkeepers have been warned to stop all supplies to my house, and I have just received a message from the post mistress to say that the telegraph messenger was stopped and threatened on the road when bringing out a message to me and that she does not think it safe to send any telegrams which may come for me in the future for fear they should be abstracted and the messenger injured. My farm is public property; the people wander over it with impunity. My crops are trampled upon, carried away in quantities, and destroyed wholesale. The locks on my gates are smashed, the gates thrown open, the walls thrown down, and the stock driven out on the roads. I can get no workmen to do anything, and my ruin is openly avowed as the object of the Land League unless I throw up everything and leave the country. I say nothing about the danger to my own life, which is apparent to anybody who knows the country.
CHARLES C. BOYCOTT
Lough Mask House, County Mayo, 14 October”
____________________________

I once suggested that those involved in booby trapping our economy be tried under the RICO statutes, and that those convicted of financially ruinous crimes be put to hard labor in front of the NYSE as an example to those who would not toe the line.

The big difference is that stealing billions of dollars makes you part of the “maker” class which means that nothing should be put in your way to bar you from your success. Meanwhile, getting caught with some baggies of marijuana officially positions you in the “taker” class, especially if you have the wrong skin coloring and can’t afford a good lawyer, which permits you to spend years as an unpaid resident of a corporaration specializing in operating correctional and rehabilitation units.

I think they wrote a musical about these miserable people a few years ago as an aspirational indication of the direction people wanted the country to move towards.

~~~

BR: CONTEXT!

I am OBVIOUSLY referring to white collar financial crime, and not the massive waste of marijuana and other drug crimes.

I enjoyed your article as well as your blog but what I can’t seem to reconcile is your disdain for certain behaviors and subsequent lack of prosecution/retribution with your seeming to be an atheist or at least sympathetic to the atheistic world view. Maybe I’ve made the wrong conclusion in regards to your world view over the years of reading your blog, however how does one expect a world devoid of ‘objective morality’, which is the widely held atheistic ethic, to objectively judge certain behaviors as objectively wrong. All these people did was just break a social rule, because that’s all laws really are, and if they can reduce the consequences or avoid them altogether all the better for them, because on the atheistic worldview they didn’t do anything ‘objectively wrong’. Just curious how you reconcile that conflict. Here is also a link to a summation of the generally held consensus of atheist philosophers in terms of ethics and the lack of ‘objective moral values’http://subversivethinking.blogspot.com/2010/12/michael-ruse-and-moral-poverty-of.html

2. You have a fundamental misunderstanding of ethics in general, and of agnostic and/or atheist ethics. One does not need to be frightened into a fearful state for one’s mortal soul to want to be a “good” person, or to behave in a way that is net positive to the world.

3. Doing the right thing is a reward unto itself (even without the promise of everlasting eternal life in heaven). That flies in the face of some organized religions — I would that doing “right” just to get a reward is what my dog does, not what I expect from my colleagues and peers.

4. I am an empiricist, and prefer to see data rather than merely assume something is true because that is the cultural norm.

1.) If I misunderstood you or your world view I sincerely apologize as that was NOT my intention, nor was it to offend you. I respect and admire your desire for greater degree of oversight and necessary regulations in the financial markets. I’m a full time trader and I’ve greatly appreciated the stuff you guys have posted on current issues like HFT and others.

2.) I have a degree in philosophy from Illinois State University and received the Kennard Scholarship Award for excellence in 2003, and wrote my senior thesis on a critique of value hedonism and my overall emphasis in study was on ethics. Atheism and Agnosticism are two COMPLETELY DIFFERENT world views. One makes a positive epistemological/knowledge claim, the other doesn’t. I never mentioned agnosticism, and if you are claiming to be sympathetic to agnosticism then there no contradiction.

3.) I get the feeling as though you think you’re being attacked by some right-winger-bible-thumper type and let me just say I”M NOT. If you look you can see that I never mentioned religion, spirituality, eternity or anything of the sort and I agree with your points that we don’t need to be frightened to do good, or that we can do good or right independent of our spiritual beliefs or perceived rewards. My objection or raised question has to do with the ontological foundations of the values themselves. For example you use words like ‘positive’ ‘good’ or ‘right’ in an objective sense, and on the classic atheist world view this is a contradiction and widely agreed upon by thinkers like Nietzsche & Sartre, and contemporaries like Quentin Smith or the two naturalist philosophers of science Michael Ruse and Alex Rosenberg that I footnoted. Again with agnosticism there is no contradiction.

4.) I don’t really have much to say on this point as I don’t have any real problems with empiricism nor did I object to it, but I’ll just end by reiterating #1, and my overall respect for you and your response.

1. I just don’t appreciate being stereotyped — as a rational empiricist, I don’t care what other people’s beliefs are, so long as they are rational. That includes disliking unproven assumptions or other myths.

2. Atheism and Agnosticism are views that do not accept at face value the nonsense poured into children’s heads before they are old enough to understand. One recognizes doubt, the other says faith based claims have not been proven. Neither requires blind obedience to dogma.

3. I have lots of colleagues who have gone to divinty school, who studied with the Jesuits, who are scholars — I was not referring to them.

4. No real problems with empiricism? I was hoping for more enthusiasm for it!

Bravo! I will remember the dog analogy the next time someone tells me that without God there are is no morality. I usually remind them of the Roman and Greek philosophers that certainly had ethical systems but whose Gods did not demand moral behavior of Their followers, just worship and sacrifice.

“Thou shalt not steal” is about as fundamental a social more as exists in every society around the world and is enshrined in the laws, past and present, everywhere regardless of people’s beliefs about god(s). Granted, in some societies they would do things like chop of their hands or hang people as punishment for theft instead of just fines and jail, but the basic principle remains the same.

The north and south walls of the Supreme Court have fantastic friezes of major figures in the historic development of modern law that go back to Menes in ancient Egypt demonstrating that the law is generally agnostic. It is true that most of these people believed in some form of divinity, in some cases believing themselves to have some form of divinity:http://www.supremecourt.gov/about/north&southwalls.pdf

Most societies, regardless of their spiritual beliefs, do make some attempt to police themselves while everybody is alive instead of just waiting for God(s) to work things out in the afterlife.

After the egregious HSBC drug money laundering settlement, I sent a letter to Eric Holders office to decry his utter unwilligness to pursue criminal (not civil) prosecutions when it comes to financial crimes of big banks. I warned of the long term implications of the legal credibility gap that the DOJ is fostering and encouraging by actively creating two sets of legal standards for prosecutions with the harsher standards being reserved only for normal citizens.

The public perception that the government is actively shielding large banks from culpability, and worse yet, that it itself is co-profiting by these crimes by just claiming a protion of the illegal proceeds for itself, to fill its own coffers, makes it look like it is OK to infest these crimes on the public as long as they get a taste of the proceeds. .

Needless to say, as expected, my words fell on deaf ears, as evidenced by Mr Cohen and company, and my message likely only earned me a check box in governement survelliance files as a ‘person of future interest’ to start to filter my online data into a separate database for future perusal..

Not having the interest of the common public is one thing (our country has a rich history of public lip service for PRs sake),but to give up all visible pretense of impartiality and to publically favor ‘economically important criminals’ is particularly galling to me.

“Why did I rob banks? Because I enjoyed it. I loved it. I was more alive when I was inside a bank, robbing it, than at any other time in my life. I enjoyed everything about it so much that one or two weeks later I’d be out looking for the next job. But to me the money was the chips, that’s all. Go where the money is…and go there often.”
– Willie Sutton 1976

Only prison confinement stopped Sutton robbing banks. Absent incarceration, he would not, admittedly could not, stop himself even if he wanted to.

Boy we could go all over the philosophical map but I just wanted to make sure that I hadn’t offended you and wasn’t badly misunderstood myself with the original question. I think your #5 wraps up your stance and that was really what I was curious about. Since you added ‘rational’ to your empiricism I guess I could give it more enthusiasm :) As far as #3 goes I agree at least to the degree that any belief be it religious or otherwise is based upon dogma, as dogmas aren’t limited to religions alone and people need to use reason & experience (rationalism & empiricism) in my view to make their own sound conclusions, be it religion, ethics, markets you name it, although some are more, correlated lets say than others. Lastly thanks for the time and we probably have more in common than was originally thought.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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